I was going to post this as a comment in the prior post...but I got rolling into full "post" length.

The Macro world lost one of its godfathers this week. Hugh Hendry has thrown in the towel and closed his fund. If you've been in this business long enough, you have been through what Hugh Hendry is dealing with. You can hear it in his voice in this interview--there are elements of regret....and relief. You can't keep a guy like him down--he'll be back, stronger than ever.


But how did this happen? Hendry claims, or at the very least implies, the global macro model is “broken” due to higher costs, low carry and fewer opportunities. What does this mean for the asset class? He's absolutely right from a business perspective. So much has conspired against global macro. Not only has the regulatory environment changed to make running the fund more difficult and expensive, but fund raising has become more difficult, time consuming and onerous, and leverage is *dramatically* harder to come by and more expensive than it was 5, 10 or 20 years ago. From an economic perspective, there is simply less alpha to go around when central banks are putting their thumb on the scales. Combine that all with flat curves and zero carry and it is amazing some funds are able to slog on as long as they have--I remember when the 4-5% carry from unencumbered equity was a nice pot of cash at the end of the year. No longer.


When I talk to pension fund and endowment managers today about how they invest their money, they want a more persuasive value proposition than "I'm smarter than the average bear." They see the market as divided up into pots of risk premia for them to exploit with their long-term time horizons. That is why they have this blood lust for private equity--historical performance argues there is a premium there that will generate superior long term returns. While that is debatable--look at my thoughts on the subject here, and here--that is the conventional wisdom being sold by armies of investment consultants, and as I highlight above, these investors need returns beyond the “LIBOR-plus” benchmark for global macro.

To make matters worse, as Hendry highlights, low rates and central bank intervention have radically changed the correlation of the asset class. If you are simply bullish, how are you going to generate alpha to justify your fees? If you are bearish, you are rolling a very large rock up a very large hill. If you are trying to find the uncovered opportunities that will differentiate your returns...well...you better hope it is far enough off the beaten path to not fall victim to the next bout of liquidity injections from the central bank of your choice, or the unwind of the previous avalanche. Without low correlation, there's simply no value.

Combine all that with money money money...Competition is fierce. Fees are still high. And the fuses are short. Tough to see how the genie will go back into the bottle for the asset class.